The Boock Report

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Retail sales and inflation

U.S. Data

Retail sales in September ex auto’s, fuel and building materials rose .4% m/o/m as expected after falling by .2% in August. In response to the hurricanes, building materials sales grew by 2.1% m/o/m and almost 8% y/o/y. Auto sales too bounced by 3.6% as seen in vehicle data last week as all those cars/trucks needed to be replaced. Outside of this, sales fell in electronics (for a 5th straight month and down 5.3% y/o/y), furniture, health/personal care, sporting goods, and department stores (what else is new). Online sales rose by .5% m/o/m after falling by .4% in August and are up 5.8% y/o/y which is actually a slowdown from recent levels. Restaurant/bar sales rose .8% m/o/m somehow in the face of all those places closed down in Houston and Florida (and where more than 100k people were temporarily not working in this industry). Sales here are up 3.3% y/o/y.

Bottom line, on a y/o/y basis, core sales (which also takes out the large influence of the hurricanes within building materials and auto’s) were up 3.3% vs 3.2% in August, and 3.3% in July and thus remains at the same mediocre pace where the 5 yr average is 3.4% vs above 5% in the prior two expansions. We can blame a growing portion of one’s after tax income going to healthcare costs (higher deductibles), rents and for young people, dealing with high debt at the same time wage growth has been just ok.

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Consumer prices in September rose .5% m/o/m at the headline level and .1% at the core. Both were one tenth below expectations and the y/o/y gains are 2.2% and 1.7% respectively. The headline print was driven by a 6.1% spike in energy prices for obvious reasons. Food prices were up just .1%. Weighing on the core rate was a .1% drop in medical care costs that are now up just 1.6% y/o/y. This helped to slow services inflation ex energy to .2% gain m/o/m and 2.6% y/o/y. Rent of Primary Residence was up by .2% m/o/m after a .4% gain in August and are up 3.8% y/o/y. Supply is coming in many areas but demand is also pretty solid but rent growth has likely peaked in this cycle. Owners equivalent rent, a faux measure of rents, was higher by 3.2%. Thus if actual rents were used in the calculation, CPI would be higher. Also weighing on prices was the continued decline in used car prices which fell .2% m/o/m and 3.7% y/o/y. New car prices also fell and overall core goods prices were down by .2% m/o/m and 1% y/o/y. This continues the trend of goods deflation. As for those wireless cell phone prices that for some reason the Fed is unhappy about falling costs, they rose .4% m/o/m but are still down almost 12% y/o/y.

Bottom line, core inflation rose 1.7% y/o/y for a 5th straight month and because it was one tenth less than expected, the 2 yr note yield is down to 1.50% from 1.51-.52% just prior. The 10 yr note is rallying as well with the yield back below 2.30%. As retail sales were no better than expected, the 2s/10s spread is now breaking below 80 bps at 79. The dollar is down in response to lower rates and gold is now above $1300. We’ll hear all day after this inflation number, even though it’s STILL above the fed funds rate, about how could the Fed hike again but because they see the tightening labor market, the Fed is hiking again in two months (putting aside whether you they should or not). I want to emphasize again that the Fed missed their rate hike window by basically ignoring 17 straight months of core CPI at 2%+ because they focused instead on the flawed number that is the PCE (CPI is flawed too) so now they feel like they must catch up. Either way, obsessing about whether inflation is 1.5%, 1.7% or 2% is complete nonsense when the fed funds rate is still only at 1.25%.

Lastly of note as we’ll hear about weakening inflation today (at core level) after the CPI print, the CRB commodity index right now is at a 5 month high, up almost 1% and higher for the 4th day in the past 5.